A California borrowing program created to help school districts manage pandemic-driven state budget deferrals used less than half of its authorization.
The California School Finance Authority ultimately issued $432.8 million in tax revenue anticipation notes in two sales out of $1.2 billion authorized.
CSFA
Officials at the State Treasurer's Office, under which the CSFA operates, said it's not necessarily an indication of a lack of need by schools, because in some cases they turned to regional programs to cover cash flow shortages.
The CSFA launched the state intercept notes program earlier this year in anticipation of state deferrals of fiscal year 2020-21 education funding to public schools and community college districts in the wake of the global COVID-19 pandemic.
California Gov. Gavin Newsom’s proposed fiscal 2022 budget would use a revenue windfall to cover most of the school funding deferred in last year’s budget, but State Treasurer Fiona Ma said in a statement that her office wanted to ensure school districts didn’t experience cash flow problems in the interim that might negatively impact student and teacher resources.
The CSFA board set the $1.2 billion figure to make sure any school districts needing the short-term financing had access, said Katrina Johantgen, CSFA’s executive director.
Some local governments, including San Diego County and Los Angeles County, also recognized the need and set up TRAN pools for schools in their counties, which might have lessened aid needed from the state, Johantgen said.
“Some felt they could make it through and some counties had the ability to borrow at a county level outside of a financing,” she said. “We were just trying to be an option. We are mission, not transaction, driven.”
CSFA priced $237.8 million in notes in three tranches on March 10 for 24 elementary, high school and community college districts at an all-in interest cost of 0.65%. A $79 million tax-exempt series matures on December 30, 2021, while one $126.9 million taxable note series matures Dec. 30 and a $31.7 million taxable series matures on August 30.
On April 7 it priced, the second sale of $195.4 million in taxable TRANs in two tranches for 16 elementary and high school districts. The $165.6 million note will mature Dec. 20, while the $30.4 million note will mature on August 30.
The finance team was the same for both deals. RBC Capital Markets, Inc. and Citigroup Global Markets were joint senior managers. Montague DeRose & Associates was municipal advisor, Norton Rose Fulbright bond counsel, and Nixon Peabody disclosure counsel.
The notes are rated SP-1 by S&P Global Ratings and F1 by Fitch Ratings, the highest short-term ratings.
The rating agencies were persuaded to treat the notes as a state credit because of the state intercept, said Tim Schaefer, deputy treasurer for public finance.
“When I say treat it as a state credit, I mean because the state already owed the school districts the money from the deferrals,” Schaefer said. “If there were an interruption on bond payments, the state would redirect the payment due from the state back to the fiscal agent for the notes.”
The state didn’t make the notes an actual state credit, because that would have meant they were backed by the full faith and credit of the state, like state general obligation bonds, and that would have to go to voters, Schaefer said. The districts are owed the money, they are just receiving it later than expected, he said.
The Fitch ratings were pegged off California’s AA issuer default rating and AA-minus appropriation rating, because the latter reflects the appropriation of school apportionments that secures the notes, the rating agency wrote in a ratings report ahead of the deals.
S&P rates California AA-minus.
“The note structure provided for the pledged revenues (deferred amounts) to be intercepted by the state controller and provided to the note trustee,” Fitch analysts wrote. “In addition, the note maturity allows for all deferrals to be paid before becoming due. Finally, the state’s general fund cash and borrowable resources, available as a source of repayment of the deferrals are ample.”
The notes are payable from the apportionment due to the participating local education agencies during the months of February, March, April, May and June 2021 that have been deferred by statute to fiscal 2022, Fitch wrote. The state’s new fiscal year begins in July.
Each participating school district pledges its deferred amount to repay the notes, and the state intercept notes are payable only from the deferred amounts owed to the participating school districts, Fitch said.
So, Fitch wrote, the Series C notes are payable from the monthly apportionments deferred from February through May that are payable by the state August through November, and the Series D notes are payable from the June deferral, which is payable by the state in July.
The rating on a pool is pegged to the lowest-rated participant, Schaefer said.
“It was important to use the state intercept to homogenize this,” Schaefer said. “The state intercept was what created uniformity in credit despite the individual position of the school district.”
Though the notes deal was open to all school districts, the program was created with smaller school districts, or those that had a negative certification from the California Department of Education, in mind, Johantgen said.
“The notes helped smaller school districts to borrow at a materially lower cost by leveraging economies of scale that may otherwise have only been available to larger school districts,” she said.
Discussions on forming the notes pool to provide aid to school districts began in July when there was a lot of uncertainty about state revenues amid business closures, rising unemployment and uncertainty over state income tax receipts because the April 2020 filing deadline was pushed to July by the federal government.
When California Gov. Gavin Newsom ordered the state’s businesses and schools closed in March 2020 to halt the spread of COVID-19 it caused a steep decline in economic activity and employment fell sharply declining by 15% from its peak, according to Fitch, higher than the 13% U.S. rate. The state began a phased reopening of businesses in May, and economic activity has picked up; but unemployment recovery has been slow rebounding 34% as of January, considerably lower than the 59% U.S. rate.
In the end, the state's income-tax-dominated revenue stream
“The important thing to remember is that when we went into the pandemic in March 2020 and the governor made his May revision, the expectation of what this budget year would look like was wildly different than what we came out with,” Schaefer said. “There was a huge amount of uncertainty about how the economic fallout would affect the state’s budget. So, the state started acting very conservatively — but under Proposition 98, schools are guaranteed to receive the most significant part of the state’s revenue receipts.”
The state was most concerned with providing market access to school districts with negative certifications or smaller districts that may not have had market access otherwise, he said.
“So we focused first on them, because they were the most vulnerable,” Schaefer said.
